Retirement planning isn't the most glamorous topic in the world, but it's a surefire way to maintain your lifestyle in your golden years. If you have a Roth IRA (individual retirement account), it's important to make the most of it while you are eligible to do so. You don't want to hit retirement age and be stuck with an empty nest egg.
If you're trying to live your best life in retirement, here are three moves you want to try to avoid in 2022.
1. Skipping out on contributions
Although it's tempting to brush off retirement contributions, it could come back to haunt you later. You won't be able to make direct contributions to a Roth IRA when your income exceeds the threshold.
For 2022, you can contribute up to $6,000 if you're under 50, but you can't contribute more than your earned income for the year. The IRS raises your contribution limit to $7,000 when you turn 50. You can max out your Roth IRA by setting up recurring transfers of $500 for 12 months if you're under 50.
Although contributing the maximum amount to a retirement account is something to aim for, it's not required. You want to contribute as much as you can based on your financial situation and goals. So, if you can't reach $6,000 this year, set a goal to tuck away a smaller amount — say, $1,200. You can set aside $100 a month or roughly $25 a week to achieve that goal.
2. Not investing the funds you contribute
Getting your Roth IRA contributions into your account is one thing. Using the money in your account to its maximum potential is another. You cannot tap into the full power of the Roth IRA unless you invest the money.
This is one Roth IRA mistake I made early in my Roth IRA journey, and it left me with pennies in my account after years of contributions. When you open a brokerage account, it's important to inquire about the type of assets you'll be able to invest in. Most online brokerage companies allow you to invest in traditional assets such as stocks, bonds, and exchange-traded funds. If you want more flexibility, you can look into a self-directed Roth IRA and get your hands on alternative investments such as real estate or cryptocurrency.
Investing your money is key to supercharging your portfolio. If you set aside $6,000 in a Roth IRA for 40 years, your account balance would be dancing around $240,000. However, if you invest the funds, you have the potential to accelerate your path to a million-dollar Roth IRA.
Here's an example:
Annual contribution: $6,000
Investment rate of return: 10%
These numbers could lead you to a million-dollar Roth IRA at age 52. You'll just have to keep the money in the account until you turn 59 1/2 — unless you take advantage of a qualified distribution. Make sure you follow the rules to avoid any taxes and penalties.
3. Withdrawing all your money before retirement
The Roth IRA is a unique retirement account because you can bypass penalties and taxes if you need to withdraw any money you've contributed.
Let's say you've contributed $15,000 over the last three years and your account value increased to $18,000. You shouldn't run into any trouble if you withdraw $6,000 because you've contributed that much to your account over the years. However, if you go too far and tap into any earnings in your account, you would trigger taxes and penalties if it isn't a qualified distribution.
Don't get too comfortable and start withdrawing all the money out of your account. The Roth IRA is intended for retirement. It's important to have another account for emergencies so that you won't be tempted to dip into your Roth IRA.
Don't forfeit your Roth IRA benefits
The Roth IRA is one of the most sought-after retirement accounts in the United States. It sets you up for tax-free income during retirement. You can pay your tax bill now and lock in tax-free benefits later. However, if you skip contributions, don't invest your money, or withdraw all your funds, you'll never get to enjoy the full power of the Roth IRA. By avoiding these Roth IRA bloopers, your future self can reap the benefits of a massive retirement portfolio that funds your lifestyle.
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